by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Today’s Comment opens with an update on the Russia-Ukraine crisis, in which the U.S. and its European allies are apparently coalescing around a set of sanctions and other actions to deter Russia from attacking.  We next preview today’s Federal Reserve decision on monetary policy and highlight a range of other U.S. and international issues that have the potential to move the markets today.  We end with an update on the coronavirus pandemic.

Russia-Ukraine:  White House officials said that if Russia attacks Ukraine as feared, they want the allied economic sanctions imposed on Moscow to include export controls on sensitive technologies needed by key Russian industries.  The export controls would be similar to those imposed by the Trump administration on Chinese telecom giant Huawei.  Analysts believe such controls could weigh heavily on Russia, despite government efforts to make the economy more sanctions-proof in recent years.  The officials said the moves would exacerbate the selloff in Russian markets, increase the country’s cost of borrowing, and hurt the value of Russia’s currency, which would raise the domestic political costs for Mr. Putin of moving on Ukraine.  The U.S. and the U.K. have also warned that they have not ruled out implementing sanctions directly on President Putin if Russia invades Ukraine.

• After weeks of calls and meetings in European cities, U.S. officials yesterday said they were seeing convergence on prospective sanctions among the U.S. and European nations, in part because of assurances that the U.S. is working to secure energy supplies should Russia invade Ukraine and cut off exports of energy westward.
• U.S. officials said they are seeking energy stockpiles in North Africa, the Middle East, Asia, and inside the U.S. that could fill Europe’s energy supply gap should the Kremlin cut the flow of gas.
• However, the task remains daunting. In mid-winter and with energy prices already high, Europe would need to find alternatives for the 40% of its gas supply that comes from Russia.

U.S. Monetary Policy:  Fed officials today end a two-day policy meeting, after which Chair Powell is expected to confirm that the central bank’s asset purchase program will end by March and set the stage for a new round of interest rate hikes.  Some policymakers’ statements have recently sounded almost panicky about inflation, creating uncertainty about how fast or how far they will hike rates and driving high volatility in financial markets in recent days.  The uncertainty is exacerbated by the way the Fed has abandoned decision-making based on models and systematic analytical frameworks that are transparent to all; in their place, the policymakers are relying much more on personal judgment.

• Futures markets currently suggest expectations for four or more quarter-point rate hikes by December (see chart below).
• Markets could remain volatile at least until the results of today’s meeting are released.

(Source: CME Group)

U.S. Banking Sector:  While cash-rich companies and households have been slow to take loans over the last year, new data show banks have enjoyed a big increase in their auto lending.  U.S. banks increased their auto-loan balances by 12% over the course of 2021, even though their total loan books increased only marginally.

Global Supply Chain Disruptions:  Preliminary data show imports unloaded in December at the ports of Long Beach and Los Angeles were down approximately 14% from the same month one year earlier, marking the fourth straight month of year-over-year declines.  The queue of vessels waiting to enter the port complex rose past 100 during December and reached a record 109 ships in early January.

• The reasons for the backups are complex: ships can’t unload quickly because terminals are full of containers. Truckers can’t pick up loads due to a shortage of drivers and the steel trailers used to pull boxes.  Warehouses near the ports and at nearby logistics hubs are short workers and don’t have space for more deliveries.
• The backups are exacerbating supply-chain delays and driving up shipping costs, which in turn are contributing to inflation reaching its highest level in decades.
• In updated forecasts, the International Monetary Fund said global supply chain disruptions, high inflation, and the latest wave of the coronavirus pandemic will weigh more heavily on global economic growth this year than previously thought. The organization now projects that global economic output growth will slow to 4.4% in 2022, compared with 5.9% in 2021 and a previous estimate of 4.9% last October.

European Union:  The EU’s General Court in Luxembourg struck down a $1.2 billion antitrust fine levied by the European Commission against U.S. semiconductor giant Intel (INTC, 51.00).  The ruling, which called the commission’s analytical methods incomplete and insufficient to establish damages, may make it more difficult for EU antitrust officials to rein in big U.S. technology companies based on antitrust issues.

Portugal:  New polling shows the far-right Chega Party led by firebrand television commentator André Ventura is now the country’s third-most popular political group.

• With parliamentary elections due on Sunday, and with the poll gap between the ruling Socialist Party and the opposition center-right Social Democratic Party narrowing, Chega’s support could now be vital to the formation of a right-of-center government.
• In any case, the surge in Chega’s support shows that Portugal isn’t as immune to far-right populism as many in the country thought.

El Salvador:  International Monetary Fund officials reviewing El Salvador’s economic prospects ahead of a potential $1 billion financing have urged the government to stop recognizing bitcoin as a legal tender in the country and expressed concern over its plan to issue bonds linked to the cryptocurrency.  The IMF concerns centered on the risks involved in the cryptocurrency, underlined by the government’s money-losing purchases of it in recent months.

COVID-19:  Official data show confirmed cases have risen to 359,140,962 worldwide, with 5,618,197 deaths.  In the U.S., confirmed cases rose to 72,178,003, with 872,126 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 251,289,667.  The data show that 75.7% of the U.S. population has now received at least one dose of a vaccine, and 63.5% of the population is fully vaccinated.

• Even though data continue to show new infections and hospitalizations related to the omicron mutation are falling back rapidly, deaths (a lagging indicator) are still on the rise.  The seven-day average for newly reported COVID-19 deaths reached 2,258 per day on Tuesday, up about 1,000 from daily death counts two months ago.  The current daily death toll is now at its highest level since February 2021.
• Despite the omicron retreat in some countries, others are still seeing rapid increases in new infections and hospitalizations.  In Japan, the seven-day average of new cases now stands at 62,613, exceeding 60,000 for the first time.  Hospitalizations, hospital bed occupancy rates, and new deaths are also at or near record highs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with the building of geopolitical tensions along the Russia-Ukraine border and in the waters off the coast of China.  We next review various political and economic developments around the world, including a brief comment regarding this week’s Federal Reserve meeting on U.S. monetary policy.  We wrap up with the latest news on the coronavirus pandemic.

Russia-Ukraine:  As Russia continues its menacing military buildup along the northern, eastern, and southern borders of Ukraine, the State Department instructed the families of U.S. diplomats in Ukraine to leave the country and authorized some embassy staff members to leave as well.  The department also recommended that all U.S. citizens in Ukraine consider leaving now on the grounds that the U.S. Embassy won’t be in a position to help Americans depart if a Russian attack is underway.

• Separately, the New York Times reported that President Biden is considering deploying several thousand U.S. troops, as well as warships and aircraft, to NATO allies in the Baltics and Eastern Europe. If true, it would signal a major pivot after several months of relying only on diplomatic and economic pressure to warn off the Russians.
• The Financial Times reports other NATO allies are also reducing their embassy staff in Ukraine, putting their military forces on standby, and sending additional ships and fighter jets to bolster the defenses of its members in Eastern Europe.
• In other key news over the weekend, the British government announced it has uncovered a Russian plot to install a new, friendly government in Kyiv. According to the statement, an ex-Ukrainian politician is the Kremlin’s preferred leader, although the statement also cited Russian intelligence links with four other former senior officials who fled to Russia in 2014 and have reportedly been plotting to return to power in Kyiv ever since.
• The continuing Russian troop buildup, reports of Moscow-friendly officials waiting in the wings, and the U.S. order to draw down its embassy staff all have started to contribute to a war scare within Ukraine, with many citizens reportedly rushing to withdraw their funds from banks. The longer the standoff continues, the greater the risk it will sap Ukraine’s economy and therefore generally weaken the country more.
• The threat of military conflict and the potential for new Western sanctions have also begun to affect the Russian economy and financial markets. The Moscow stock market fell over 7.5% today; yields on Russia’s government debt hit their highest level in six years. The ruble lost 1.5% to trade at 78.9 to the dollar, a 14-month low.

Source:  The Daily Mail

 China-Taiwan-Japan:  Although the Russia-Ukraine crisis has garnered the most attention recently, it’s important to remember that military tensions also continue to rise in the waters between China, Taiwan, and Japan.  For at least the last six months, the Chinese navy has maintained the continual presence of at least one warship in the waters south and east of the southernmost Japanese islands.  That marks China’s first consistent deployment of naval forces beyond the “first island chain” and demonstrates the military and economic threat it poses to Japan, especially if it were ever able to control Taiwan.

• Separately, China sent dozens of warplanes on threatening trajectories near Taiwan’s airspace over the last two days, in their biggest such show of force since October.
• The sorties were apparently meant to register Beijing’s anger over a joint U.S.-Japan naval exercise involving two U.S. aircraft carriers that concluded over the weekend.

Source:  Financial Times

 China:  In a sign that President Xi continues to clamp down on powerful private businesses and what he sees as threats to China’s moral fabric, the government has launched an investigation into “disciplinary violations” by vaping tycoon Chu Lam You.  In Hong Kong, news of the investigation sent her company, Huabao International Holdings (336 HK, HKD, 4.86), tumbling by over 65%.

 Italy:  Parliament members and other senior politicians today begin the process of voting for the country’s new president, with all eyes on whether they will keep Italy’s most celebrated technocrat, former ECB chief Mario Draghi, as prime minister, allowing him to forge ahead with an ambitious EU-funded reform program, or elevate him to head of state, potentially triggering a paralyzing crisis over a successor to head the government.

• As the voting gets started, media tycoon and four-time prime minister Silvio Berlusconi has given up on his long-shot bid for the presidency.
• Berlusconi, who was convicted of tax fraud in October 2012, said he decided to pull his name from consideration so lawmakers from across the political spectrum could choose a less divisive candidate.

Yemen-United Arab Emirates:  The UAE intercepted two missiles launched by the Iran-allied Houthi rebels in Yemen, one week after a strike by the group killed three people in Abu Dhabi.  The attack highlighted the growing threat from the Houthis, who have targeted neighboring Saudi Arabia with missile and drone strikes for years.

U.S. Monetary Policy:  Fed officials begin their next two-day policy meeting tomorrow, after which Chair Powell is expected to confirm that the central bank’s asset purchase program will end by March and set the stage for a new round of interest-rate hikes.  As if that isn’t unsettling enough for the financial markets, some policymakers’ statements have recently sounded almost panicky about inflation, creating uncertainty about how fast or how far they will hike rates.

COVID-19:  Official data show confirmed cases have risen to 351,903,261 worldwide, with 5,598,042 deaths.  In the U.S., confirmed cases rose to 70,700,678, with 866,540 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 250,763,600.  The data show that 75.5% of the U.S. population has now received at least one dose of a vaccine, and 63.4% of the population is fully vaccinated.

Virology

• The seven-day average of people in U.S. hospitals with confirmed or suspected cases of COVID-19 declined for the third consecutive day, reaching 157,425 on Sunday. The number of new COVID-19 admissions to hospitals across the U.S. was also down.
• Even though the highly transmissible Omicron mutation is quickly subsiding in much of the country, a monthly poll by the U.S. Census Bureau indicated almost 8.8 million people were out of work in January because they were sick or caring for someone with COVID-19. That’s by far the highest such figure since the survey began in mid-2020, exceeding the 6.6 million recorded in January 2021 and three million from December’s survey.
  • In addition, the number of people reporting they weren’t working due to concern about getting or spreading the disease rose to 3.2 million in the January survey from 2.6 million in December.
  • Other recent studies suggest concern about COVID-19 is continuing to push people into retirement.
  • The resulting business disruptions could be a key reason for the jump in initial jobless claims reported last week.  Some economists fear “peak Omicron” could even lead to a decline in January nonfarm payrolls, although the momentum in the economy would probably quickly reverse any payroll decline.

 Economic and Financial Market Impacts

• In the U.K., airlines still battling to get ridership up to pre-pandemic levels, have warned they will be forced to run half-empty and highly polluting “ghost flights.” New government rules compel carriers to fly more regularly to retain their lucrative take-off and landing slots at busy airports.  The Department for Transport today said airlines would have to hand back airport slots if they were not used 70% of the time from March 27, up from the current threshold of 50%.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Treasury yields have moderated, and equity futures are higher. Today’s report begins with a few items from President Biden’s speech yesterday. Next, we discuss U.S. economic and policy news followed by China-related stories. International news follows, and we end with our pandemic coverage.

The President Speaks: On Wednesday, President Biden marked his first year in office with an address and a news conference. During this speech, the President briefly discussed his accomplishments and shortcomings in his first year in office. He touted his success in getting the economy to reopen and lowering unemployment and also stated he could have done more to speed up the availability of rapid testing. In addition, the President discussed his expectations for his second year in office. He mentioned that the Build Back Better Act would likely need to be scaled back, the Fed will need to fight inflation, and his administration will continue fighting for voting rights.

When the topic of Ukraine was brought up, the President stated the U.S. expects a “minor incursion” by Russia that would fall short of a full-scale invasion. This remark led to speculation that the U.S. was prepared to offer lighter sanctions depending on the scale of the invasion.  The White House would later clarify that the U.S. and its allies are prepared to respond swiftly if Russian military forces cross the Ukraine border. It still leaves unanswered what a “minor incursion” means and whether other acts of aggression such as cyberattacks and paramilitary tactics will lead to a strong response from the West.

Unity among the U.S., Europe, and other NATO allies was questioned. On Wednesday, French President Emmanuel Macron has called on the European Union to secure its own security pact with Russia rather than rely on NATO. The tiff has added to Ukraine’s concerns as it fears that the West may be unwilling to provide the security it needs to feel protected from Russian aggression. Ukraine President Volodymyr Zelensky has told U.S. lawmakers that threatening sanctions after Russia invades his country is not helpful. Nonetheless, the fragmented relationship between the U.S. and Europe likely suggests Ukraine will probably be a dividing issue amongst Western countries and could be valuable in Russia’s attempt to break up the relationship between the U.S. and Europe. If we are right, this could be somewhat bearish on commodities, as Russia will likely not risk a major conflict that could disrupt the flow of commodities. However, it could also encourage Russia to further weaponize its natural gas in an attempt to pressure Europe to get the Nord Stream 2 Pipeline finished.

Economics and policy: 

• Democrats appear to be preparing a slimmed-down version of President Biden’s Build Back Better plan. The decision to reduce the size of the bill comes after West Virginia Senator Joe Manchin stated he could not support the current bill. At this point, the party needs to secure a victory going into midterm elections. The new bill is expected to pare back much of the social spending and keep most of the climate change provisions.

• The Senate Judiciary Committee will consider a tech-focused antitrust bill on Thursday. The American Innovation and Choice Online Act will look to reign in big tech companies’ ability to favor their own services in an anti-competitive way. Although the bill appears to have bipartisan support, the White House has stopped short of endorsing it. The bill, if passed, will likely be detrimental to tech equities.
• The United States government has pledged its support for Bosnia as the country suffers its worst economic crisis since its 1992-1995 war.

China:

• A United States Navy guided-missile destroyer traveled through the South China Sea on Thursday in a direct challenge to China’s claim of sovereignty. The Chinese military accused the ship of entering its waters illegally and warned of serious consequences if these actions continue. Although China has established military infrastructures throughout the islands within the sea, the area has also been claimed by Taiwan and Vietnam.
• China disclosed it has begun importing oil from Iran. The disclosure comes as the West revives talks of a nuclear accord with Tehran. The decision by China to resume purchases will likely give Iran added leverage in negotiations.

International news:  

• President of the European Central Bank Christine Lagarde stated she does not plan to follow the Federal Reserve’s lead in tightening monetary policy. She justified her position by stating that in Europe, the recovery is slower, and inflation is lower. There is no reason for the ECB to act as rapidly as the Fed plans to.  Moreover, she stated she expects inflation to stabilize gradually in 2022, but the central bank is ready to act if the data “demands it.”
• Turkish President Recep Tayyip Erdoğan and Salvadoran President Nayib Bukele will meet on Thursday. The two are expected to discuss cryptocurrencies. El Salvador is planning to launch a bitcoin-backed bond, in which the country will use the sale of $1 billion in U.S. dollar-denominated bonds to buy bitcoin, and fund construction projects related to bitcoin. In Turkey, a currency crisis due to rampant inflation has led to capital flight from the country into cryptocurrencies. Although Turkey banned the use of crypto as a form of payment last year, it appears Erdogan may be interested in using the digital asset to help mitigate his country’s currency crisis.
• U.K. Prime Minister Boris Johnson’s woes continue after a senior Conservative MP accused his team of threatening to blackmail backbenchers who are attempting to oust him from office.
• Russia and Iran are looking to form stronger ties to counter the U.S.’s ability to punish them with sanctions.
• Silvio Berlusconi, former Prime Minister of Italy, appears to be preparing for a political comeback as the country’s president.
• The Prime Minister of Finland, Sanna Marin, stated her country does not plan to join NATO in the near future. The country shares a border with Russia, and its membership in NATO would likely spark a response from Moscow.

COVID-19:  The number of reported cases is 338,164,251, with 5,567,277fatalities.  In the U.S., there are 68,569,958 confirmed cases with 857,778 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 654,197,025 doses of the vaccine have been distributed, with 530,430,844 doses injected.  The number receiving at least one dose is 249,702,939, the number of second doses is 209,509,297, and the number of the third dose, the highest level of immunity, is 81,691,581. The FT has a page on global vaccine distribution.

• A study from the Centers for Disease Control and Prevention showed that Americans who were previously infected and received the vaccines had the highest protection against the Delta variant.
• The White House plans to distribute non-surgical N95 masks from its national stockpile and make them available to the public for free starting next week to curb the spread of COVID-19.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Today, our Comment begins with remarks regarding yesterday’s market volatility.  We next provide an update on the tensions at the Russia-Ukraine border.  We then cover a few U.S. and international news items that have the potential to affect the financial markets today, and we wrap up with the latest developments related to the coronavirus pandemic.

Global Financial Markets:  Although early morning transactions suggest financial markets will be better behaved today than they were yesterday, some trends remain in place.  Investors continue to bid down bond prices on expectations for higher policy rates to combat inflation pressures.  The yield on Germany’s ten-year Bund rose above 0% for the first time in 30 months, ending at 0.01%.  In the U.K., the yield on ten-year Gilts hit its highest level since March 2019, after data showed inflation in the country reaching a 30-year high (see data tables below).  In the U.S., the yield on the ten-year Treasury note is edging higher past 1.85%.

• In an interview with the Financial Times, Bundesbank Vice President Claudia Buch warned that German banks are becoming too complacent about the risk of borrowers defaulting and the potential for interest rates to rise, particularly in the country’s booming mortgage market.
• Even cryptocurrencies have taken a hit from expectations for higher interest rates.  The biggest cryptocurrencies have lost as much as 14% of their value so far this year.
• Illustrating the unease about inflation and the prospects for aggressive central bank action to fight it, some investors are reportedly now thinking the Federal Reserve could impose a 50-basis point hike at its policy meeting in March.
• We still think the Fed and other central banks will have to pull their punches before hiking rates as far as the market believes.  We believe tighter policy could quickly expose financial fragilities somewhere in the economy or begin to weigh on real economic activity, even as today’s high inflation rates start to moderate because of more favorable “base effects” and supply disruptions get resolved.  High financial market volatility, with the VIX over 20 (as it is today), has also typically discouraged the Fed from further policy tightening.  In the meantime, however, financial markets will remain susceptible to bouts of volatility.

Global Energy Markets:  In its monthly report, the International Energy Agency hiked its forecast for global oil demand this year to 99.7 million barrels per day, up 3.3 million bpd from 2021.  That would mean that oil demand this year will finally surpass the 99.5 million bpd registered before the pandemic in 2019.

• According to the IEA, the higher forecast reflects growing coronavirus immunization rates and fewer economic lockdowns despite the fast spread of the Omicron mutation.
• The forecast will likely feed into concerns about high inflation this year, even though the IEA projects global oil supply will exceed demand by a narrow margin.

Russia-Ukraine:  As of this writing, President Putin still has not unleashed the dogs of war against Ukraine, giving the U.S. and its European allies additional time to pursue diplomatic and security measures to stop the threatened attack.

• On the diplomatic level, U.S. Secretary of State Blinken today is meeting Ukrainian President Zelensky and Foreign Minister Kuleba in Kyiv, demonstrating the U.S. commitment to Ukraine’s sovereignty. Tomorrow, Blinken will travel to Berlin to confer with German Foreign Minister Baerbock, who met with Zelensky in Kyiv earlier in the week and then visited Russian officials in Moscow yesterday.  Blinken’s meeting in Berlin will also include the foreign ministers of France and the U.K.  Finally, Blinken is scheduled to meet with Russian Foreign Minister Lavrov in Geneva on Friday.
• Separately, U.S. officials said the Biden administration would impose financial sanctions on four Ukrainian officials known to have supported the country’s pro-Russian separatists.  Since the sanctions would put indirect pressure only on Russia, they are seen as an effort by the administration to thread the needle between imposing costs on Moscow and not closing the door to diplomacy.
• Reporting in recent days suggests the U.S. has also backed off the idea of cutting Russia out of the SWIFT dollar transfer system in the event of a Russian attack, in part because of discomfort among European governments.  With their proximity to Russia and close trade ties with the country, the Europeans are also struggling to decide how to respond if Russia launches non-military aggression on Ukraine, such as a cyberattack.
• Despite the diplomatic efforts and sanction threats, Putin continues to send threatening signals.  The most important move over the last few days has been the opening of joint Russian-Byelorussian military exercises in Belarus.  The forces gathered there could conceivably cross the Byelorussian-Ukrainian border, supporting an offensive crossing from Russia into Ukraine.

Kazakhstan:  Russia’s ambassador to Kazakhstan, Aleksey Borodavkin, and Russian General Andrei Serdyukov, who led the Collective Security Treaty Organization’s Russian-led “peacekeeping” mission in Kazakhstan this month, said the operation is now over and that “all” CSTO troops had left the former Soviet republic.

U.S. Antitrust Policy:  The Department of Justice and the Federal Trade Commission yesterday announced they are seeking input from the public on a major overhaul of merger and takeover rules designed to improve competition in the economy.  The announcement marks the first step in a shake-up of antitrust rules and enforcement policy that President Biden called for last year.

U.S. Insurance Market:  Two of the biggest insurance companies offering home insurance for multimillion-dollar properties in California say they will stop offering coverage in the state, citing the rising risk of wildfires and tough state regulations.

United Kingdom:  As Prime Minister Johnson continues to face a potential no-confidence vote over his pandemic “bring your own booze” garden party scandal, the anger within his own Conservative Party has prompted a right-wing member of parliament, Christian Wakeford, to defect to the Labour party.  That marks the Tories’ first defection to the Labour Party in 15 years.

Turkey-United Arab Emirates:  Turkey and the UAE, formerly archrivals, have signed a swap agreement that will boost Turkish foreign currency reserves by almost $5 billion.  The deal is only the latest in a succession of swap agreements Turkey has signed to shore up its dwindling reserves.  It is not expected to provide any significant support for the lira since analysts typically strip out borrowed funds when assessing a country’s foreign currency holdings.

Afghanistan-Pakistan:  Even though Pakistani Prime Minister Khan welcomed the Taliban’s takeover of Afghanistan last summer, he’s now finding that their victory has unleashed hardline Islamist sentiment that is difficult to control.  Apart from the border tensions, these range from surging violence by emboldened domestic extremists to a growing political challenge from Pakistani Islamist parties who identify with the Taliban’s views.

COVID-19:  Official data show confirmed cases have risen to 334,541,052 worldwide, with 5,557,369 deaths.  In the U.S., confirmed cases rose to 67,598,609, with 854,076 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 249,393,487.  The data show that 75.1% of the U.S. population has now received at least one dose of a vaccine, and 63.0% of the population is fully vaccinated.

• Today, the Biden administration is officially launching its new website for ordering free COVID-19 tests. The site, covidtests.gov, will link people to an order form on the U.S. Postal Service website.
  • There is a limit of only one order for four tests per address.
  • People can provide an email address to receive updates on the order.
  • The free tests are expected to start shipping in late January, according to the USPS website, and would usually be sent out within seven to 12 days of ordering.
• The administration is also expected to announce plans to make 400 million N95 masks available free at pharmacies and community health centers across the country.  The masks should be available at pharmacies and community health centers late next week, and the program will be fully up and running by early February.
• An Israeli study found that a fourth shot of the vaccine from Pfizer (PFE, 54.11) and BioNTech (BNTX, 169.23) was largely ineffective in stopping Omicron infections despite boosting antibodies.  The news is likely to be welcomed by those worried about the need for more and more shots beyond a mere booster.
• Pfizer said three different lab tests showed that its oral antiviral pill Paxlovid is effective against the Omicron mutation.  The study results haven’t yet been peer-reviewed, but if they are confirmed, the easily administered drug will probably become an important treatment that can keep people from becoming seriously ill or dying from COVID-19.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we open with a few remarks on the downdraft this morning in most global financial markets.  We next provide an update on Russia’s military buildup along its Ukraine border.  We then cover a range of other international news developments.  We wrap up with the latest news on the coronavirus pandemic.

Global Financial Markets:  As U.S. investors return to the markets after yesterday’s holiday, expectations for Fed rate hikes have worsened, apparently in response to stray comments by financial executives last week that the monetary policymakers might hike their benchmark fed funds rate a half dozen or more times this year.  Adding to the interest-rate concerns, the Bank of Japan today lifted its inflation projections for the first time since 2014, conjuring up images of a potential rate hike by the BOJ.  Futures markets today suggest investors expect “only” four Fed rate hikes by December (see CME chart below), but that is still uncomfortable enough to drive down bond and stock values.

• The yield on the two-year Treasury note today has jumped to approximately 1.025%, surpassing 1% for the first time since early 2020.
• The yield on the ten-year Treasury obligation has risen a bit more moderately to 1.825% or so, leaving the yield curve slightly flatter and adding to evidence that bond investors fear a policy mistake in which the Fed will hike rates too far and slow the economy.
• We continue to think the Fed will have to pull its punches before it hikes rates as far as the market currently believes.  We think tighter policy could quickly expose financial fragilities somewhere in the economy or start to weigh on real economic activity, even as today’s high inflation rates begin to moderate because of more favorable “base effects” and some supply disruptions get resolved.  Besides, high financial market volatility, with the VIX over 20 (as it is today), has typically scared off the Fed from further policy tightening.  Nevertheless, investors today are in a panic about sharply rising interest rates, and it’s unclear how long the markets will remain volatile.

Source: CME

Russia-Ukraine:  At least as of this writing, President Putin still hasn’t launched an attack on Ukraine, even though 100,000 or so Russian troops and enough military equipment for many more than that remain poised along Ukraine’s northern, eastern, and southern borders.  U.S. officials also say Russia has secretly deployed saboteurs to Ukraine so they could be ready to launch a “false flag” attack on Russian interests there, in case the Kremlin needs justification for an attack.  Russia has also been evacuating its diplomats from its embassy in Kyiv, in another potential sign of impending conflict.

• Russian officials have expressed frustration with last week’s diplomatic talks between Russia and the U.S., its NATO allies, and a broader group of European countries.  In those talks, the U.S. and its partners refused Russia’s demand for security guarantees, including a prohibition on any other former Soviet republics joining NATO and a rollback of NATO’s presence in the republics that have already joined.  Russian officials have given the U.S. and its allies one week to meet Russian demands.
• In addition to holding a gun to Ukraine’s head in the form of its massive military buildup on Ukraine’s borders, a cyberattack against Ukraine in recent days adds to the threats that Russia hopes will convince the West to meet its demands.
• As of right now, the U.S. and its allies are generally closing ranks and presenting a united front against Russia’s demand for what would be a sphere of influence in Eastern Europe.  For example, British Defense Minister Wallace yesterday told parliament that the U.K. is sending “light anti-armor, defensive weapon systems” to Ukraine, and he is inviting Russian Defense Minister Shoigu to London for talks in the coming weeks to help defuse the crisis.  However, some cracks among the allies have been noticed, including some European discomfort over the Biden administration’s approach and some countries, such as Germany, expressing concern over the economic impact of rising tensions.
• In any case, tensions remain high, and if they continue to escalate, they could start to have a real impact on global financial markets.  Obviously, a major shooting war would do the same.  Less obvious is how the markets would react to a more limited action by the Kremlin, such as an incursion focused on the ethnically Russian-dominated provinces of Donbas and Luhansk in eastern Ukraine, where separatists have been fighting the central government for seven years.  Limited airstrikes or cyberattacks could also help get Putin’s point across and present challenges for the markets.

China:  Amid signs of significant economic slowing ahead of the Communist Party’s 20^th National Congress later this year, the People’s Bank of China cut two of its key interest rates over the weekend.  The modest rate cuts suggest the government is increasingly anxious to keep up economic growth ahead of the Congress, where President Xi will seek approval for a third term in office.  Indeed, PBOC Vice-Chair Liu today promised that the central bank would introduce further moves to stabilize the economy and prevent a “collapse” of credit.

• Meanwhile, the National Bureau of Statistics yesterday said China’s population grew just 0.034% in 2020, to 1.413 billion.  Births fell to a modern low of 10.62 million, barely ahead of the country’s 10.14 million deaths.  Importantly, China’s declining birth rate means fewer young people are entering the labor force each year, meaning the government doesn’t have to worry quite as much about creating new entry-level jobs.  That’s probably one reason President Xi has been willing to launch his recent clampdown on powerful, fast-growing high-technology firms.
• Slowing economic growth in China, reflecting factors ranging from the government’s crackdown on property investment and technology firms to the rapidly spreading Omicron mutation of the coronavirus, would have a noticeable negative impact on global economic growth.  Investors are therefore likely to be encouraged by Beijing’s steps to loosen monetary policy and lighten up a bit on its regulatory drive.

 United States-China:  The FBI and a U.S. investment-screening panel are investigating a Chinese government-backed investment company’s purchase of a 47% stake in a California manufacturer of small recreational, amphibious planes.

• A group of U.S. shareholders has accused the Chinese firm of hollowing out the company and moving its technology to China.  The technology apparently has potential military applications.
• The U.S. move is only the latest in a series of initiatives that underscore the threat to U.S.-China capital flows.  As we have argued previously, the clampdown on such flows is an increasing risk for investors.

United Kingdom:  Prime Minister Johnson continues to face mounting pressure to resign because of last week’s news that he attended a “bring your own booze” party in the garden of Downing Street against his government’s social-distancing rules early in the pandemic.

• Former chief advisor Dominic Cummings yesterday accused Johnson of lying to Parliament about the incident.
• Tory Members of Parliament reportedly faced blistering criticism from constituents over the weekend, with many now openly calling for Johnson’s head.
• Adding to the troubles, the latest polling puts the Tories 13 percentage points behind the opposition Labor Party.
• Johnson’s fate will depend highly on an investigation conducted by a senior civil servant.  Her report could come out as early as this week, depending on its conclusions and how it casts the incident.

Yemen-United Arab Emirates:  Yemen’s Houthi rebels said they were behind yesterday’s drone and missile attacks on the United Arab Emirates, which killed three people.  The Houthis, who are backed by Iran, said they had targeted Abu Dhabi in retaliation for the UAE’s recent escalation of its support for the Yemeni government in a Saudi-led coalition.  The attack has sparked fears of wider violence in the region, adding to today’s jump in energy prices.

Emerging Market Debt:  The World Bank issued a report saying a group of 74 less-developed countries will have to pay some $35 billion to official bilateral and private lenders in 2022, up about 45% from their required payments in 2020 (the last year for which figures are available).

• The jump in debt costs reflects both the resumption of payments after some countries took advantage of a moratorium early in the coronavirus pandemic and a big increase in borrowings by some countries trying to cushion the blow from the pandemic.
• For countries with dollar-denominated debt, the strength of the greenback will make it especially challenging to meet their debt service.  The risk of an emerging-market debt crisis remains elevated.

COVID-19:  Official data show confirmed cases have risen to 331,166,002 worldwide, with 5,547,903 deaths.  In the U.S., confirmed cases rose to 66,456,516, with 851,730 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 248,707,43.  The data show that 74.9% of the U.S. population has now received at least one dose of a vaccine, and 62.9% of the population is fully vaccinated.

Virology

• With the Omicron mutation continuing to spread rapidly, the seven-day average of new U.S. cases topped 800,000 for the first time over the weekend.  More important, the seven-day average of confirmed and suspected COVID-19 hospitalizations topped 155,000 for the first time, putting high stress on the healthcare system.  Fortunately, however, falling rates of new infections in Europe and some parts of the U.S. suggest there may be a light at the end of the tunnel.
• Data from Europe and the U.S. show there are more child admissions to hospitals in recent days than at any other time during the pandemic.  However, severe cases have remained rare in the youngest age groups, and Omicron infections generally look similar to other common respiratory illnesses.
• In Japan, the government today reported over 30,000 new cases of COVID-19, marking a new record high for the pandemic.  The government is now preparing to put Tokyo and other prefectures under quasi-emergency measures to combat the Omicron variant.
• In China, authorities again warned citizens that the coronavirus could be spread via mail and frozen foods after they were unable to pinpoint the origin of Beijing’s first case of the Omicron variant.
  • According to a Beijing municipal official, contact tracing of more than 16,000 of the patient’s contacts turned up no infections, but investigators found the virus on letters mailed to the patient from Toronto, Canada.
  • The World Health Organization says it is possible for people to become infected after touching contaminated surfaces or objects, but researchers generally believe that risk is very low.
  • As Chinese citizens tire of the government’s “zero COVID” policy, the suggestion that the Beijing case came from overseas will likely spark new concerns that China is trying to shift blame for the pandemic and make foreigners the scapegoats for the crisis.  If so, that would further poison the relationship between China and other major countries.
• In Hong Kong, officials launched a probe into hamsters imported from the Netherlands after a fully vaccinated pet store employee tested positive for COVID-19. Several hamsters and a shopper also tested positive.  The city government said more than 1,000 hamsters would be culled, and about 150 pet store visitors would be sent to government quarantine facilities.
• Responding to the new case in Beijing, the government announced that most Chinese citizens would not be allowed to attend the Winter Olympic Games to be held in the city starting in early February.  China had already barred foreign spectators from attending.
• A new study shows vaccination “certificates” or “COVID passes” introduced in France, Germany, and Italy increased the vaccination rate in those countries by 13.0, 6.2, and 9.7 percentage points, respectively. The effect was especially large among older population groups.

 Economic and Financial Market Impacts

• New data shows that Texas, Arizona, Utah, and Idaho have now recovered all the jobs they lost at the start of the pandemic, leading to a trend that is expected to include another dozen states by the middle of this year.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with President Biden’s Fed picks and additional U.S. economic and policy news. Next, we discuss China’s trade surplus. We then focus on international news, and we conclude with a pandemic update.

Economics and policy: 

• The White House announced President Biden’s nominations to the Federal Reserve Board on Thursday. As expected, former Fed Governor Sarah Bloom Raskin was selected to take over as Federal Reserve Vice chair for Supervision. Biden also chose economists Lisa Cook, a professor of economics at Michigan State University, and Philip Jefferson, a professor and administrator at Davidson College, to fill the other two vacant Fed board seats. The picks will need to be confirmed by the deeply divided Senate. We expect Raskin will have a fairly easy time getting nominated due to her previous nomination as a Federal Reserve Governor. However, the two additional candidates may face greater scrutiny, as Senators on both sides of the aisle will probably seek assurances from the nominees that they will be supportive of efforts to combat inflation.
  • Current Fed Governor Christopher Waller signaled he could support as many as five rate hikes this year if inflation remains too hot.
• The amount of money investors have stashed at the Federal Reserve facility jumped by the most since the end of 2021. Seventy-nine counterparties stored $1.637 trillion at the Federal Reserve overnight reverse repurchase agreement facility (RRP). The increased usage of the facility appears to be driven by the investors’ need to store their short-term cash. One reason for the surge into RRP could be for regulatory purposes: another reason could be the lack of short-term treasuries. That being said, the problem will likely persist while the Fed maintains its asset purchase program, which is expected to end by March.
• Mortgage rates continue to surge based on expectations that the Federal Reserve will raise interest rates multiple times this year. The combination of higher rates and home prices will likely reduce demand for homes, as fewer buyers will be able to afford to make the purchase. According to the Federal Reserve Bank of Atlanta, Americans needed 33% of their income to cover mortgage payments in 2021.  That is up from the 29% required in 2020. We expect housing prices could start to rise at a slower pace in 2022 and could possibly fall.
• The Earth’s temperature rose to its sixth-highest level on record in 2021, according to the National Aeronautics and Space Administration (NASA).

China:

• Global demand continues to boost Chinese exports. In December, Chinese exports were $340.5 billion, pushing the annual total to $3.36 trillion. The strong growth in exports comes despite the supply chain issues due to the pandemic and a real-estate property meltdown that has slowed economic growth. In 2022, we expect that a weaker yuan relative to the dollar could be supportive of trade growth. According to China’s General Administration of Customs, the U.S. was the country’s largest export market in 2021. Despite an increase in Chinese exports, the prices for these goods were more favorable to the U.S. when compared to trade partners.

International news:  

• Tensions over Ukraine continue to simmer as NATO leaders and Russian officials are struggling to come to terms over a security agreement that could prevent further escalation. Russian Foreign Minister Sergei Lavrov has warned NATO that Moscow will not wait “endlessly” to ensure a security deal. Meanwhile, the U.S. is pressuring its European allies to agree to potential sanctions if Russia invades Ukraine. Talks between the two sides have failed to come to an agreement, and Russia has only ramped up the pressure in recent days. On Thursday, several Ukrainian government agencies were hit with a cyberattack that warned Ukrainians to “be afraid and expect the worst.” In addition, the attack brought down a few government agency websites. The tense geopolitical situation has led to an increase in natural gas prices in Europe as the financial markets fear a potential conflict and are growing concerned that Russia could withhold more of its natural gas from the continent.
• The Bank of Korea (BOK) raised its key policy rate by 25 bps to 1.25% on Friday and signaled the central bank is prepared for additional rate hikes. This is the bank’s third-rate hike since the summer. The aggressive rate hikes suggest the BOK may be more concerned with an increase in inflation than with the risks posed by the spread of COVID-19. Over the last few months, inflation has been driven primarily by rising transportation costs.

• Bank of Japan policymakers are discussing a timeframe to begin telegraphing an eventual rate hike.  The latest CPI report in Japan shows that annual inflation rose 0.6% from the prior year, its highest level since the start of the pandemic.
• North Korea appeared to have launched two ballistic missiles hours after threatening the U.S. On Friday, Pyongyang warned that it would take a “stronger and certain reaction” if the U.S. sanctioned individuals associated with its weapons program. Over the last few days, Washington has advocated that additional U.N. sanctions must be imposed on North Korea in response to its recent missile launches. Earlier this week, a North Korean missile launch forced some airports on the U.S. west coast to halt flights as a precaution.

COVID-19:  The number of reported cases is 320,609,453, with 5,522,759 fatalities.  In the U.S., there are 64,083,262 confirmed cases with 846,488 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 646,546,885 doses of the vaccine have been distributed, with 524,199,956 doses injected.  The number receiving at least one dose is 247,987,225, the number of second doses is 208,564,894, and the number of the third dose, the highest level of immunity, is 78,139,161. The FT has a page on global vaccine distribution.

• The European Medicines Agency warned that frequent booster shots may cause more harm than good. The agency explained that frequent booster doses, described as every four months, could weaken the immune system, and tire out the body. It recommends that countries should leave more time between shots and schedule the boosters to align with the onset of cold season.
• The Supreme Court has blocked President Biden’s vaccine mandate for large businesses but allowed the mandate for healthcare workers. The court’s decision will likely make it harder for the Biden administration to increase vaccination rates.

• Hong Kong is expected to extend its COVID restrictions and flight ban until after the Lunar New Year. The region has struggled to contain the spread of the Omicron variant.

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